The major development over the past week was the Federal Open Market Committee (FOMC) Meeting. The Federal Reserve didn't signal any change in policy in terms of interest rates or tapering its asset purchases. However, there were some meaningful developments in terms of the "dot plot" which showed that a majority of Committee Members anticipate rate hikes by 2023. This is despite Committee members not increasing their outlook for employment or growth in 2023.

The initial reading by many market participants was that it was a slight hawkish pivot. However, upon further analysis, it seems that the Fed may be making a policy error at least by the initial reaction from the bond markets.

Basically, the Fed has taken pains to signal that it is following a new framework in terms of how it would interpret inflation data when crafting its policy. Until now, the Fed would hike in anticipation of inflationary pressures building. However, Fed Chairman Jerome Powell changed the Fed's framework by saying that it would now only raise rates when inflation was above their 2% target on a "symmetrical basis."

The implication of this is that the Fed would let the economy run hot for many months until it began tightening policy. And, Powell went out of his way to show his commitment to the new framework by saying that the "Fed wasn't talking about talking about raising rates."

However, the shift in dot plots is making many question whether the Fed is truly operating on a new framework especially as the recent increase in inflation is more about supply chain issues and soaring costs in certain items like used cars that are not true inflation. And, already, there are signs that inflation has peaked as supply chain issues are being fixed.

Based on the reaction from the bond market, the Fed may have made a mistake that could take us back to the low-growth circumstance that has defined much of the past decade.

The 30Y Treasury has declined from 2.45% in early March to 2%, while the 10Y Treasury yield declined from 1.75% to 1.45%. At the same time, the 2Y Treasury yield spiked from 0.15% to 0.25%. This flattening of the yield curve is not a good sign for the economy and certainly not an ideal outcome for the Fed or the economy. Most important, it calls into question that the Fed is willing to trash its new framework at the first hint of inflationary pressure.

Even though, most likely this is just a temporary phenomenon.